The New Monetary Disorder

PRINCETON – Currency chaos is back, highlighting demands for a revised international monetary order. The rapid decline of the dollar and the pound, but also of the renminbi – now more firmly tied to the dollar than ever – is fanning tensions. Some of the ghosts of the 1930’s have returned, too – in particular, the fear of unfair trade advantages caused by competitive devaluation. United States Treasury Secretary Timothy Geithner has already accused China of currency manipulation.

There are two alternative and sharply contrasting approaches to getting currencies right. One is to have an international conference at which experts can suggest models to calculate exchange rates and politicians can negotiate deals. The only successful instance of such an arrangement is the Bretton Woods conference in 1944, but even then the exchange rates that were fixed there proved unrealistic, and a major wave of parity alterations was soon needed (as well as the maintenance of exchange controls).

Other currency-centered conferences were dismal failures. President Richard Nixon hailed the 1971 Smithsonian agreement as “the most significant monetary agreement in the history of the world.” But it was soon in tatters, and the world moved to generalized floating.

In 1987, at the Louvre conference, there was not even any agreement about what had been concluded. Some participants thought they had agreed to a sort of semi-fixing of exchange rates in the form of target zones, but the powerful German Bundesbank never shared that interpretation.